• on Feb 16th, 2015 in Finances: Cost & Revenue | 24 comments

    What if your credit card company told you: “You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment. It’s the responsible thing to do.” Doesn’t seem quite right, does it?

    Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like. The Postal Service is required to pay the full estimate of its liabilities, currently estimated at nearly $404 billion, even as that estimate moves around and is based on assumptions that are highly uncertain and can frequently change over the life of the liability. Our recent white paper, Considerations in Structuring Estimated Liabilities, evaluates these assumptions and other considerations and shows the Postal Service is closer to being fully funded, or potentially overfunded, when certain assumptions are reasonably adjusted or considered.

    First, let’s look at current funding levels. The Postal Service has set-aside cash totals of more than $335 billion for its pensions and retiree healthcare, exceeding 83 percent of estimated future payouts. Its pension plans are nearly completely funded and its retiree healthcare liability is 50 percent funded – much better than the rest of the federal government. But getting to this well-funded position has been painful. The Postal Service’s $15 billion debt is a direct result of the mandate that it must pay about $5.6 billion a year for 10 years to prefund the retiree healthcare plan. This requirement has deprived the Postal Service of the opportunity to invest in capital projects and research and development.

    As things stand now, retiree healthcare, pensions, and workers’ compensation are unfunded by about $86.6 billion. But our paper says any discussion of unfunded liabilities should take into consideration assets that could be used to satisfy the liabilities, such as real estate. The Postal Service’s real estate assets have a net book value of $13.2 billion. But fair market value of these properties is estimated as high as $85 billion. Neither is factored into the Postal Service’s ability to meet future liabilities.

    In addition, the liabilities are not exact or static amounts and they require certain assumptions, such as interest rates and demographic inputs, to estimate the future costs of these programs. For example, interest rates are at historic lows. Even slightly higher interest rate assumptions would reduce or eliminate the estimated liabilities.

    Our paper details how different assumptions and considerations would affect the liabilities. Basically, if the Postal Service’s real estate assets were considered and one other assumption adjusted, the long-term liabilities would be overfunded.

    Mandating 100 percent prefunding of future liabilities that are frequently changing and highly uncertain could unnecessarily damage the Postal Service, inflate prices, and overfund future liabilities.

    Share your thoughts on our paper. Do you agree or disagree with the overall premise of the paper or have additional insight to share? 

  • on Jan 19th, 2015 in Finances: Cost & Revenue | 35 comments

    For the first time in years, the U.S. Postal Service has money to invest in its future. Postal officials have said they expect to spend about $2 billion on capital projects in 2015.

    There’s a good chance most of that investment will go toward revamping the 190,000-vehicle fleet – one of the Postal Service’s most pressing needs. Our audit work found that the Postal Service’s vehicle fleet is adequate for delivery needs only until about 2017.

    Another area overdue for investment is facility maintenance and improvements. An earlier audit report found that budget constraints have hindered the Postal Service’s ability to fund facility repairs and alterations. About half of its incomplete repairs in fiscal years 2011 and 2012 were potential safety and security problems, our report noted.

    While $2 billion is a nice chunk of change, it’s a relatively small capital investment for a $68 billion organization. Still, the Postal Service has had so little available money for capital projects over the past few years that $2 billion seems like a bonanza.

    So this week, we are asking you to weigh in with your suggestions on how the Postal Service should invest its $2 billion. Should vehicle fleet replacement be the number one priority? Or facilities? Where else is capital investment needed? What else would be on your wish list if extra funds were available? 

  • on Mar 10th, 2014 in Finances: Cost & Revenue | 5 comments

    Benjamins, dough, cabbage, coin, greenbacks. Most of us could rattle off a dozen or more slang words that mean money. But we might be unsure what certain financial terms -- operating income, liquidity -- mean. When you follow the U.S. Postal Service, this might put you at a disadvantage, especially when it’s quarterly financial statement time.

    Operating income measures earnings (revenues minus expenses) before interest and taxes. Liquidity is the amount of financial resources (cash, equity, assets, credit) that an organization can easily convert to cash for spending and investments. Postal officials often mention the Postal Service’s lack of liquidity. Chief Financial Officer Joe Corbett said in January that the Postal Service’s liquidity, at its highest point in the year, is only about $3 billion. This isn’t much cushion for a $65 billion entity. And the cushion shrinks at certain points in the year, such as in October, when the Postal Service makes its workers’ compensation payment to the Labor Department.

    UPS and FedEx, companies with revenues about $20 billion less than the Postal Service, have liquidity of about $12 billion and $14 billion respectively, he noted. But what does this mean exactly? Well, companies with strong liquidity positions, such as UPS and FedEx, have much greater access to capital than the Postal Service. They have more opportunity to invest, whether in capital projects or new businesses. The Postal Service’s weak cash position means it cannot invest in the infrastructure or innovation. It also has no margin for error. What happens if a catastrophe strikes in October right after the Postal Service has made its workers compensation payment?

    Finally, the Postal Service has no available cash to pay down its debt. It reached its statutory borrowing limit of $15 billion in FY 2012 and it has been unable to borrow from the Treasury Department for more than a year.

    The Postal Service says employees will get paid – this is not an issue. And it has enough cash on hand to pay suppliers. But it has had to forego needed investment in its infrastructure, such as facility maintenance and vehicle replacement. And as the Postal Service considers a new business model for the digital age, it has no available cash to invest in new opportunities. It has not had the funds to make its required prefunding payment to the retiree healthcare fund for the past few years. The postage price increase in late January should help its cash position, but it will not build the bigger cushion it needs.

    Share your thoughts on the Postal Service’s cash position. What is hurt most by the Postal Service’s lack of liquidity? Is it missing opportunities because of its cash shortage? If its liquidity position were to improve, what should be the Postal Service’s priorities (infrastructure investment, paying down debt, lowering postal rates, etc.)? 

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